Working Paper: CEPR ID: DP2195
Authors: Lars E. O. Svensson; Jon Faust
Abstract: We examine a central bank's endogenous choice of degree of control and degree of transparency, under both commitment and discretion. Under commitment, we find that the deliberate choice of sloppy control is far less likely under a standard central-bank loss function than reported for a less standard loss function by Cukierman and Meltzer. Under discretion, maximum degree of control is the only equilibrium. With regard to the degree of transparency, under commitment, a sufficiently patient bank with sufficiently low average inflation bias will always choose minimum transparency. Under discretion, both minimum and maximum transparency are equilibria. We argue that discretion is the more realistic assumption for the choice of control and that commitment is more realistic for the choice of transparency. A maximum feasible degree of control with a minimum degree of transparency is then a likely outcome. The Bundesbank and the Federal Reserve System are, arguably, examples of this outcome.
Keywords: Commitment; Discretion
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Commitment (D23) | Minimum Transparency (Y70) |
| Discretion (Y60) | Minimum and Maximum Transparency (Y20) |
| Standard Loss Function (C29) | Sloppy Control (E61) |
| Commitment (D23) | Control Choices (D87) |
| Discretion (Y60) | Control Levels (E61) |